Benefit of home loan interest depends on property’s status

Quantum of deduction towards interest on housing loan depends on whether the property is self-occupied, deemed let out property, or let out property


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I work with an information technology company in Bengaluru and own a property in Delhi, in which my parents stay. There is no outstanding housing loan on it. I have booked an under-construction flat in Bengaluru and have availed a home loan for it. The possession is expected by September 2016. Can I claim the principal and interest benefit on the home loan under section 80C (of the income-tax Act) as well as the Rs.1.5 lakh interest bracket? I wanted to know how one can claim the pre-equated monthly instalment (EMI) interest before possession of property.

—Hitesh Jain

We have assumed that due to your job you currently stay in a rented apartment in Bengaluru and the Delhi property is considered as a self-occupied property (SOP). We further understand that your other property in Bengaluru is under construction.

Once you get possession of the aforesaid property in Bengaluru, you would own more than one property. In such a case, any one of the residential properties, at your discretion, should be considered as SOP. Accordingly, the other property owned by you, even if not actually let out, will have to be considered as deemed let out property (DLOP).

Hence, the quantum of deduction towards interest on housing loan would depend on whether the aforesaid properties are considered as SOP or DLOP or let out property (LOP).

This distinction will be based on factors such as will you continue to stay in a rented premise in Bengaluru, will your parents continue to stay in your property in Delhi, or will either of the above properties be rented out.

In case you start staying in the new and owned Bengaluru property and treat it as SOP, you can claim deduction towards interest paid up to Rs.2 lakh per financial year (FY).

If the property is instead treated as LOP or DLOP, then the entire interest paid can be claimed as deduction against the net rental value or deemed rental value offered to tax as per the domestic tax law.

Do keep in mind that in case you are staying in the Bengaluru property, treating the same as a DLOP can be litigious and can be challenged by the Indian tax authorities.

Additionally, you can claim deduction towards repayment of principal portion of the housing loan subject to an overall cap of Rs.1.5 lakh per FY under section 80C, irrespective of whether the property is SOP, LOP or DLOP.

The pre-construction interest paid for the period prior to the FY in which the Bengaluru property is completed shall be deductible in five equal annual instalments. These instalments will commence from the FY in which the construction of the property was completed.

Accordingly, the tax deduction towards aggregate interest (including one-fifth of pre-construction interest) can be claimed from FY2016-17, which is the year in which the property’s construction would be completed.

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